Time is money: choosing a charging method for IT services

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Time is money: choosing a charging method for IT services

Time recording can enable more accurate charging for IT services, but there is no single best practice when it comes to charging business users for the IT they use, said Barbara Gomolski, research vice-president at analyst firm Gartner.

Organisations must choose the method that is appropriate to their circumstances. Gomolski identified seven key methods of charging business units for IT, each of which has its own strengths and weaknesses:

Service-based pricing

Good for defined, end-to-end services. It is often available in the open market but it takes time and effort to define processes and workflows, benchmark against third-party suppliers, monitor ongoing performance, and agree any price changes.

Negotiated flat rate

Good for well-defined projects, but business units need to lock down the requirements and the scope of the project.

Tiered flat rate

Good for helpdesks, application maintenance and datacentres, but disparate business units need to agree on pricing tiers.

Measured resource usage

Good for infrastructure services such as storage, e-mail and telecoms, this method can identify the heaviest users and charge appropriately, and therefore fairly. However, business units cannot forecast the size of invoices, and may regard fixed costs as being split unpredictably and an effort to administer.

Direct cost

Good for application development and dedicated projects, this method needs clear scoping, change control, transfer to maintenance mode, plus third-party benchmarking.

Low-level allocation

Good for setting a subscription fee for basic services such as desktops, IT overhead, strategy and IT architecture. Though simple to administer, this lacks fairness as power-users are subsidised by base-level users. As this method imposes no constraints, demand can then become unpredictable and rise uncontrollably .

High-level allocation

Good for simplicity as all IT costs are shared out among business units, but it fails to identify and charge variably for heavy usage or expensive projects.

Gomolski said, "Whichever method is used, chargeback systems are often seen as a minefield for the IT managers administrating them.

"Indeed, the ideal scenario is to have no need for a chargeback scheme because the business self-regulates its demand for IT, prioritises and funds IT initiatives accordingly, and is confident that IT is a good financial steward and has the benchmarks to prove it."

Until that day, however, IT needs to ensure that it understands the business unit's priorities and concerns. Also, business units need to understand the pros and cons of each method, and the trade offs they will need to make.   Gomolski said, "It is crucial that business units sign off on the final system as their own creation, because their sense of ownership is critical to ensure harmonious and co-operative operations."

 

What's your priority?

The method is chosen for charging business units for IT will depend on the priorities of the business unit being charged, said Barbara Gomolski, research vice-president at analyst firm Gartner:

Simplicity

For when business units want IT bills that are easy to understand. Simplicity is commonly a priority with business units that want a method which is low-cost to administer. Also a priority when overall IT costs are low, or when IT is highly trusted.

Fairness

A priority for business units that only want to pay for their own IT and not cross-subsidise other units. This is popular when IT is mistrusted, or when the business suspects IT costs are out of control. Also used in decentralised organisations.

Predictability

Useful when there is a good match between initial budget and final invoice. This is popular when business units are performance-driven and want to avoid any variability in operating costs.

Controllability

For business units that want to actively manage their IT budgets. Good when economic times are precarious, or business units need to be flexible.


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This was first published in October 2005

 

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